SMSFs flagged on audit requirements around precious metal assets
Before going down the path of holding precious metals in an SMSF, it is important to understand not only the options, but also the rules that surround these assets when facing the auditor, says one technical specialist.
In a recent technical online update, SuperGuardian education manager Tim Miller said that, as a starting point, it is necessary to ensure both the SMSF trust deed and investment strategy allow for this type of asset to be held. If not, he noted you will need to have these documents updated to allow for this acquisition before you proceed.
There are three main ways a fund can hold precious metals such as gold and silver: exchange-traded fund (ETFs), gold or silver coin, and gold or silver bars/bullion.
For gold or silver exchange-traded funds, Mr Miller said an ETF can be purchased for metals such as gold, silver, platinum and copper. The ETFs are designed to track the price of acquisition and consist of one principal asset, the metal itself.
“The funds consist of a derivative contract which is backed by the metal, so you don’t physically own the metal in its tangible form. The investment is traded on the major stock exchanges, and when you come to sell the asset, it can only be redeemed for cash,” he said.
It is also possible to hold gold or silver coins in your SMSF, and Mr Miller noted SMSFs are likely to be paying a premium above the face value, as they are considered to be a “collectable” asset.
“Also, buying in this format means that they will be caught by the investment rules around ‘collectables’ held by SMSFs,” he said.
“Under the rules for collectables, such as coins, you may not receive any present-day benefit from the asset. They cannot be leased, used or displayed by a related party and must not be stored in a private residence of a related party. You will be required to insure the coins within seven days of acquisition.
“Not meeting these requirements could result in a contravention and the fund being made non-complying. When you come to sell the coins, you are required to sell them at market value determined by a qualified, independent valuer.”
In terms of holding gold or silver bullions, the holding of a precious metal in the form of bars is probably the most common form, according to Mr Miller. As a result, holding precious metals in this form avoids it being caught by the collectables rules which apply to coins.
“Many trustees still choose to store their bullion in a storage vault or the mint for security reasons even though it is not compulsory for them to do so. The bars can legally be stored at a person’s home, but there are additional risks and documentation required if a trustee decides to do so,” Mr Miller said.
Satisfying audit requirements
To effectively satisfy the audit requirements, Mr Miller said for gold or silver ETFs, it is easier to meet the annual audit requirements in relation to the verification of the holding and the market value as it is a listed security.
“As ETFs are traded on the ASX, the holding is verified by the registry holding statement at 30 June and the market value is the most transparent of all forms as it is listed on the ASX,” he explained.
In terms of coins, holding gold or silver in this form involves a stricter set of rules and additional audit requirements, according to Mr Miller.
The fund will be required to provide proof to the fund’s auditor at year-end where the asset is being stored along with the insurance certificate to verify the coins were insured within seven days of acquisition.
“There also needs to be a market valuation from a qualified, independent valuer if coins have been sold during the year,” he explained.
“And the coins need to be revalued at a very minimum of at least every three years (even if the coins aren’t being sold) or sooner if there are any significant events that are likely to affect the value of the coins.”
When it comes to holding bullion at a storage facility or at the mint, it will be important to make sure documentation provided by these third parties will act as proof of the holding to the auditor.
“If trustees choose to store their bullion at home or their business premises, the auditor will require a resolution as at 30 June of each year which confirms the inventory listing of the type(s) and quantities of metal held along with confirmation the asset is stored securely and not available for personal use by the members and that the metal(s) are insured for the correct value,” he explained.
“Valuations are less costly than holding metals in the form of a collectable. The market value can easily be verified to live prices which are readily available on a number of bullion dealers’ websites.”